12.10.10 Issue #457 info@mckenziemgmt.com 1-877-777-6151 Forward This Newsletter

Nancy Caudill
Senior Consultant
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Does 2011 = Salary Increases?
By Nancy Caudill, Senior Consultant McKenzie Management

“I dread the new year coming. My staff members are expecting a salary increase because I have given them one every year since the office opened 9 years ago. What should I do this year?”

Sound familiar? 

Let’s review the seven categories of your practice’s P&L that comprise the expenses that are evaluated from a practice management standpoint:

  1. Office Supplies
  2. Dental Supplies
  3. Facility Costs
  4. Lab Costs
  5. Gross Salary for your team, not including yourself
  6. Benefit Expenses for your team, including matching SS, Medicare, unemployment, vacation, sick leave, holidays, etc.
  7. Miscellaneous

As you know, a healthy overhead for a general family practice is 55-60% of net collections for the year. If you were over 60% for the past 12 months, the first recommendation would be - no raises this year. However, before carving that in stone, I would suggest that we evaluate each of your categories first. Here is why:

Let’s say that your Facility Costs are 8% instead of 5% because you lease the building back to yourself and you have over-inflated the rent compared to the area. To be more realistic, check to see what it would really cost you to lease a nice space in the same general area with the same square footage. Would that put you closer to the 5% goal?

Review your dental/small equipment supplies. Did you purchase some small equipment that can’t be depreciated but will last for several years, and you won’t have that expense again for some time, such as hand instruments? Are your lab costs too high because you are having too many crown failures, creating “redo’s” and running up your lab fees with no revenue to offset it? If it is the lab, change labs. If it is the type of crowns that you are using, consider changing crowns to increase success. Did your office supply expenses soar this year because you changed your logo and had to reprint all your stationery? You won’t incur that expense next year.

You can see where these points are leading you - if your total overhead is over 60%… determine why.

Salary Overhead Goals
Standard gross wage expenses for your team is 19-22% of net collections. Gross wages are ONLY their gross wages before the withholding reduces it. For instance, if they are paid $20/hr and work 40 hours, their gross wages for that period are $800. You discover that even though your overhead is over 60%, your gross wage percentage to net revenue is only 21%. Do you increase their salaries 1% overall for the upcoming year?

It all depends on the above-mentioned categories that were too high. Calculate an estimated overhead for the next 12 months and factor out the extraneous expenses that you incurred last year that you won’t have this year. At the same time, be fair and consider any expenses that you may have for the New Year that you didn’t have last year. If your new estimated overhead puts you below or equal to 60% of net revenue, I would vote “yes” to the salary increase!

What About Benefits?
Before you get too excited and spread the good news at your Christmas Party, let’s review the benefit dollars that you are spending for your staff. The goal is 3-5% of net income. What if yours is 6%? That is 1% too high so together, 21% in gross wages + 6% in benefits = 27%, which is your maximum goal.

If your benefits are more than 5%, I can surmise that you are paying too much in medical benefits, offering too many vacation days that you can’t afford, or contributing to a retirement plan that you can’t afford. Now I have to vote “no” to the salary increase.

But They Are Great Employees!
Assuming that you have been following the McKenzie Management e-newsletters for years, you are already running a “lean and mean” dental machine! You have eliminated the employees that were not team players and the team you have now are hard-working, dedicated professionals that enjoy their jobs. The patients think they are wonderful, and so do you. Now what?

Establish your 2011 collection goals to reflect a decrease of their benefit expenses to 5% or less. Meet them half way and offer to increase their salary in 6 months if they are meeting or exceeding the new collection goals. At the end of the year, if they are still meeting and exceeding the goals, increase their salaries again to bring their total wages and benefit package to no more than 27% of collections.

Maybe it is the Holiday Season and I am feeling generous. At the same time, I also see how hard your team members are working to continue to help you have a successful and profitable practice while at the same time giving quality service and care to your patients. Outstanding performance should be rewarded in conjunction with a financially healthy practice.

My best to you and your team in 2011. I hope for you all good health and prosperity for the upcoming year.

If you would like more information on how McKenzie's Consulting Coaching Programs can help you IMPLEMENT proven strategies, email info@mckenziemgmt.com.

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